The housing data released yesterday helps us reiterate our bullish perspective on the housing sector. Existing home sales have risen at the quickest pace in almost 2 years, while homebuilder sentiment has also augmented to six-year highs. Meanwhile, new housing starts also increased this month, as did refinancing applications. All these developments, coupled with record-low mortgage rates, are increasingly affirming the fact that the housing sector is gaining traction in this otherwise depressed U.S. economy.
Although we continue to remain bullish on homebuilders, with KB Home (NYSE:KBH), Lennar Corp. (NYSE:LEN), D.R. Horton (NYSE:DHI), Pulte Group Inc. (NYSE:PHM), and Toll Brothers Inc. (NYSE:TOL) being our favorites, we advise investors to decrease long positions in those homebuilders who have already rallied significantly, like PHM, TOL and LEN. Although we expect some further upside, this strategy is advisable in order to realize safe profits, without taking any significant risk. For those long positions that are not decreased, a potential hedging tool can be SPDR homebuilders ETF (NYSEARCA:XHB), which needs to be shorted.
According to Reuters, the groundbreaking on new homes increased by 2.3% in August, relative to a 2.8% drop in July. According to the Commerce Department, housing starts rose and reached a seasonally adjusted annual rate of 750,000 units, as against July's revised level of 733,000 units. However, this increase still fell short of economists' expectations, who had forecasted a level of 765,000 units.
Homebuilder sentiment has also touched a 6-year high in September, and this sector is expected to contribute to GDP growth this year for the first time since 2005. This is because, according to economists' estimates, for every newly constructed house, at least three new jobs are created, even though residential construction accounts for a meager 2.5% of the GDP.
Existing Home Sales
According to the recently released data by the National Association of Realtors, existing home sales in the United States have augmented by a whopping 7.8% in August to settle at an annual rate of 4.82 million units. This rate depicts the fastest annual increase in more than two years, and is way above analyst expectations of an annual rate of 4.55 million.
According to the Principal of Centurion Real Estate Partners in New York, John Tashjian, "We continue to see positive signs emerging from the housing market, suggesting that the entire market, not just individual submarkets, are stabilizing and steadying themselves for future growth."
Fixed 30-year mortgage rates have dropped to an average level of 3.72%, which is the lowest level in history. As a result, according to the Mortgage Bankers Association, the seasonally adjusted index of refinancing applications increased by 0.8% in the past week. However, loan requests for home purchases dropped by 3.8%.
We continue to remain bullish about the housing sector, which is continually showing signs of improvement. The following graph shows the stock price movements of major homebuilders in the United States.
Source: Google Finance
The following table also shows the essential valuation metrics for these seven major homebuilders: Lennar Corp. , Beazer Homes USA (NYSE:BZH), KB Home, D.R. Horton, Pulte Group Inc., The Ryland Group Inc. (NYSE:RYL), and Toll Brothers Inc.
Forward P/E (1 year)
Source: Yahoo Finance
Despite being bullish on the housing sector, we feel that out of our favorites (KBH, LEN, DHI, PHM, and TOL) investors can cut long positions in PHM, TOL, and LEN. This is because of the fact that these companies have already experienced huge stock appreciations on a YTD basis, with PHM, TOL, and LEN being up by 162%, 77%, and 85%, respectively. In addition, their forward P/E and P/B ratios are the highest relative to their peers. Consequently, it is an appropriate time to realize safe profits from the stocks of these three positions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Basic Resources Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.